To estimate the required risk-adjusted rate of return on a highly volatile energy stock, a risk associate compiled the following statistics:

To estimate the required risk-adjusted rate of return on a highly volatile energy stock, a risk associate compiled the following statistics:

Risk-free rate = 5%

Beta = 2.5

Market Risk = 8%

Using the Capital Asset Pricing Model, she estimates the rate of return to be equal:
A . 10%
B . 15%
C . 25%
D . 40%

View Answer

Answer: C

Explanation:

To calculate the required return using CAPM:

Required return = risk-free rate + beta × market risk premium

Substituting the given values: Required return = 5% + 2.5 × 8% Required return = 5% + 20% Required return = 25%

Therefore, the estimated rate of return using the given statistics is 25%.